topic Perfect. Thank you in Retirement tax questions

Excess 2016 and 2017 Roth IRA contributions. How to fix?

ramsgusom — Wed, 05 Jun 2019 03:01:06 GMT

I am not allowed to make any direct roth IRA contributions. But by mistake I had contributed for 2016 and 2017. And when I look back at my tax returns, I never mentioned these contributions.

Last month I withdrew both my 2016 and 2017 Roth IRA contributions (along with associated gains). This means I'll be getting my1099-R next year. My question is... what is the next step?

Do I need to amend my 2016 and 2017 returns? Or can I just pay the penalty along with my 2019 return? If I have to amend, do I amend now or after I receive my 1099-R next year? Will it change my penalty if I do it this year vs next year? I was told that if I remove my excess contributions by the 2018 tax deadline, I don't have to pay penalty for the 2018 tax year.

What part of the 2016/2017 mess do I mention in my 2018 return? Do I just not mention anything and wait till next year to deal with it? Do I pay the penalty now or do I I wait till next year to pay the penalty? (6% per year that the excess is not withdrawn, plus 10% on earnings)

Please advise.

amend return now

andyeda — Wed, 05 Jun 2019 03:01:07 GMT

amend return now

You must file 2016 and 2017 Forms 5329 to report and pay...

dmertz — Wed, 05 Jun 2019 03:01:09 GMT

You must file 2016 and 2017 Forms 5329 to report and pay the excess contribution penalties associated with the excess contributions. On the 2016 Form 5329 you'll have a penalty of 6% of the amount that you contributed for 2016 and on the 2017 Form 5329 you'll have a penalty on 6% of the sum of the contributions made for 2016 and 2017.

You'll also have 2018 From 5329 reporting the same excess (2016 excess contribution plus 2017 excess contribution) as on the 2017 Form 5329 and pay the same amount of excess contribution penalty with your 2018 tax return.

The distribution made in 2019 will be reportable on your 2019 tax return.

These excess contributions were correctable in 2019 by a regular distribution of exactly the amount of the excess, with no adjustment for earning. The distribution of the actual excesses is not taxable because it is a distribution attributable to your contribution basis, but the earnings distributed will be taxable and potentially subject to early-distribution penalty if you have no other Roth IRA contribution or conversion basis to apply to the amount distributed in excess of the amount of the excess contributions.

The first paragraph was helpful. But I was sure that I do...

ramsgusom — Wed, 05 Jun 2019 03:01:10 GMT

The first paragraph was helpful. But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline.

You did not receive distributions of the excess contrib...

dmertz — Wed, 05 Jun 2019 03:01:11 GMT

You did *not* receive distributions of the excess contributions before the dues dates of your 2016 and 2017 tax returns, respectively. Because these excess contributions were not corrected before the end of 2018, you owe the same penalty for 2018 as you owe for 2017. Excess contributions corrected after the due date of your tax return are only corrected for the tax year in which the distribution of the excess occurs and subsequent years.

I've added to my answer describing how these excess contributions should have been corrected in 2019.

"But I was sure that I do not have to pay penalty for 201...

macuser_22 — Wed, 05 Jun 2019 03:01:12 GMT

"But I was sure that I do not have to pay penalty for 2018 since I had withdrawn the amount by the tax deadline."

That only applies to the year in which the excess contribution was made - in this case, *2016* that had to be withdrawn before the 2016 due date (April 15, 2017). After that, the 2016 excess must be removed before the end of the next tax year (Dec. 31, 2017) to avoid the 2017 repeating penalty - the same thing applies to the 2017 excess contribution had to be removed before Dex 31, 2018 to avoid the 2018 penalty.

You now have (had) until Dec. 31 2019 to remove all excess to avoid the 2019 penalty (that you did with the 2019 distribution).

I just got off the phone with the turbotax CPA, and she s...

ramsgusom — Wed, 05 Jun 2019 03:01:14 GMT

I just got off the phone with the turbotax CPA, and she says I don't have to amend previous returns. Just wait till I get the 1099-R next year and pay the penalty along with my 2019 return. But you guys are saying I have to amend 2016/2017 and attach Form 5329 for each?

Who is correct?

Since the excess was removed in 2019, there will be no...

macuser_22 — Wed, 05 Jun 2019 03:01:15 GMT

Since the excess was removed in 2019, there will be *no* 2019 penalty to pay at all. It is not possible to report and pay a prior years penalty on a 2019 tax return.

A 2017 penalty can *only* can only be reported and paid on a 2017 5329 form, likewise for a 2018 penalty.

Either whoever you talked to did not understand the situation, that this is not a 2018 contribution removed in 2019, or they answered incorrectly.

IRS 5329 instructions:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i5329.pdf">https://www.irs.gov/pub/irs-pdf/i5329.pdf</a>
"Prior tax years. If you are filing Form
5329 for a prior year, you must use the
prior year's version of the form. If you
don’t have any other changes and
haven’t previously filed a federal income
tax return for the prior year, file the prior
year's version of Form 5329 by itself
(discussed earlier). If you have other
changes, file Form 5329 for the prior
year with Form 1040X, Amended U.S.
Individual Income Tax Return."

Because, there will be "other changes" - the added penalty and overall tax due - amending is necessary.

Okay. You sound like you know what you are talking about....

ramsgusom — Wed, 05 Jun 2019 03:01:17 GMT

Okay. You sound like you know what you are talking about. Is this something I can do on turbotax or should I just go to a CPA?

For the 2016/2017 amendments, is it just the 5329 form, or does the amendment involve other complicated forms?

CPAs are often not well versed in the parts of the tax co...

dmertz — Wed, 05 Jun 2019 03:01:18 GMT

CPAs are often not well versed in the parts of the tax code involving less common retirement-account situations.

Assuming that it doesn't affect any other part of your 2016 and 2017 tax returns, such as a mistakenly haven taken Retirement Savings Contributions Credit based on these contributions (it appears that you did not), you might be able to file the 2016 and 2017 Forms 5329 stand-alone, but the IRS sometimes asks that you include Form 1040X and Schedule 4 to show this change to Other taxes and to provide explanation. Either way you'll need to pay the penalty calculated on each of these Forms 5329.

You'll file your 2018 Form 5329 with your 2018 tax return and the penalty on that form will be included in determining your refund or balance due.

With your 2019 tax return you have 2019 Form 8606 Part III reporting the regular distribution and applying your Roth IRA contribution and possibly Roth conversion basis to determine the taxable amount, if any. You'll also have a 2019 Form 5329 reporting this distribution as correcting the excess carried from 2018 into 2019, leaving you with $0 of excess and $0 of penalty.

If you want to try filing the 2016/2017 5329's as a stand...

macuser_22 — Wed, 05 Jun 2019 03:01:20 GMT

that was beautiful. thanks a lot.

ramsgusom — Wed, 05 Jun 2019 03:01:21 GMT

that was beautiful. thanks a lot.

I had a question about the 5329 - Do I have to pay the 10...

ramsgusom — Wed, 05 Jun 2019 03:01:22 GMT

I had a question about the 5329 - Do I have to pay the 10% penalty on the earnings for every year I file the 5329

For example, I contributed $3000 towards 2016 Roth IRA and $4000 towards 2017 Roth IRA. When I withdrew the amount in 2019, there was a net profit of $300.

When and how am I paying the 10% penalty on earnings?

Since the distribution of the excess is a normal distribu...

macuser_22 — Wed, 05 Jun 2019 03:01:24 GMT

Since the distribution of the excess is a normal distribution and not a "return of contribution" distribution, only the contribution amount itself needs to be removed. The earnings can stay in the account because the penalty has been paid on the 5329 form.

If the earnings were/are aslo removed, and the 2019 1099-R amount is (or will be) the total contribution plus the earnings then any amount distributed in 2019 that exceeds your own prior total contributions (including the excess contributions) will be taxable in 2019 and subject to the 10% penalty if under age 59 1/2.

You can always remove your own prior contributions (not previously removed) tax and penalty free.

On the 5329 you only enter the excess contribution amount, not any earnings.

Perfect. Thank you

ramsgusom — Wed, 05 Jun 2019 03:01:25 GMT

Perfect. Thank you

If it's been less than 60 days since the distribution fro...

dmertz — Wed, 05 Jun 2019 03:01:27 GMT

If it's been less than 60 days since the distribution from the Roth IRA, as long and you have not done an indirect rollover of an IRA distribution in the 12 months preceding this distribution and will not do another indirect rollover of any other distribution made in the 12 months following this distribution, you can roll back into the Roth IRA the portion that was not necessary to be distributed.

We are assuming that the Roth IRA custodian handled this correctly and will be reporting this as a regular distribution, not a return of contribution before the due date of your 2018 tax return because you apparently made no contribution for 2018 that would be eligible for such a return of contribution. However, some IRA custodians (particularly banks) are somewhat clueless with regard to proper procedures and will sometimes make a "return of contribution" when no contribution for the year was actually made. That often results in needing to file a substitute Form 1099-R (Form 4852) to report the type of distribution that was actually made. (If it doesn't qualify as a return of contribution before the due date of the tax return, it's a regular distribution no matter what the Form 1099-R provided by the payer says.)

Re: Since the distribution of the excess is a normal distribu...

kate3116 — Thu, 23 Jan 2020 03:44:17 GMT

I am having a similar problem as the original poster and have found the responses to be very helpful. Thank you, @macuser_22 and @dmertz. (I posted my own question regarding this situation yesterday

I think I am finally starting to grasp how to fix this mess.

I am working on withdrawing my excess contributions for 2017 and 2018 now. I am recharacterizing 2019 contributions to avoid the excess.

I will go back and amend my 2017 and 2018 to claim the penalty for the excess contributions for those years and include the penalty for those years in my 2019 taxes.

The following part of your answer is confusing to me:

"Since the distribution of the excess is a normal distribution and not a "return of contribution" distribution, only the contribution amount itself needs to be removed. The earnings can stay in the account because the penalty has been paid on the 5329 form."

1) Do I not have to pay the 6% penalty on the earnings from the excess contributions? There is no penalty at all on the earnings?

2) Can I keep the earnings in the account and just withdraw the contributions?

"You can always remove your own prior contributions (not previously removed) tax and penalty free."

3) When I withdraw the contributions, I don't pay taxes or a penalty on that withdrawal?

4) If I were to remove the earnings as well, I would have to pay tax and penalty on the earnings on my 2020 return?

Thank you so much in advance!

Re: Since the distribution of the excess is a normal distribu...

macuser_22 — Thu, 23 Jan 2020 04:08:43 GMT

@kate3116 wrote:

The following part of your answer is confusing to me:

"Since the distribution of the excess is a normal distribution and not a "return of contribution" distribution, only the contribution amount itself needs to be removed. The earnings can stay in the account because the penalty has been paid on the 5329 form."

1) Do I not have to pay the 6% penalty on the earnings from the excess contributions? There is no penalty at all on the earnings?

2) Can I keep the earnings in the account and just withdraw the contributions?

"You can always remove your own prior contributions (not previously removed) tax and penalty free."

3) When I withdraw the contributions, I don't pay taxes or a penalty on that withdrawal?

4) If I were to remove the earnings as well, I would have to pay tax and penalty on the earnings on my 2020 return?

Thank you so much in advance!

If you remove the excess AND earnings BEFORE the due date of the tax return (or extended due date) then there is no penalty. If you miss that due date then you will owe the 6% penalty on the *excess* contribution for each year that it remains in the account. Any earnings attributed that that excess stay in the account since the penalty on the excess has been paid.

Re: You must file 2016 and 2017 Forms 5329 to report and pay...

2004taxfile1 — Sun, 21 Mar 2021 20:30:30 GMT

I have similar case.

For Roth IRA excess contribution ($6500) made in Jan 17, 2017 (at age 58, March 31, 2017 turned to 59), removed contribution with earnings in March 2021:

Q1: Do I pay 10% early withdrawn penalty for each year plus 6% penalty for over 5 years?

Q2: Do I need to amend tax return1040 for 2017, 2018,2019,2020, 2021 to pay taxes on earnings?

thanks a lot!

Roth IRA Excess Contribution on 2017 - How to fix it?

2004taxfile1 — Sun, 21 Mar 2021 20:34:42 GMT

@dmertz

I have similar case.

For Roth IRA excess contribution ($6500) made in Jan 17, 2017 (on March 31, 2017 turn to age 59), removed ineligible contribution with earnings in March 2021:

Q1: Do I pay 10% early-distribution penalty for each year plus 6% penalty for over 5 years?

Q2: Do I need to amend tax return1040 for 2017, 2018,2019, 2020, 2021 to pay taxes on earnings?

Thanks for your advice!

topic Perfect. Thank you in Retirement tax questions

Excess 2016 and 2017 Roth IRA contributions. How to fix?

amend return now

You must file 2016 and 2017 Forms 5329 to report and pay...

The first paragraph was helpful. But I was sure that I do...

You did *not* receive distributions of the excess contrib...

"But I was sure that I do not have to pay penalty for 201...

I just got off the phone with the turbotax CPA, and she s...

Since the excess was removed in 2019, there will be *no*...

Okay. You sound like you know what you are talking about....

CPAs are often not well versed in the parts of the tax co...

If you want to try filing the 2016/2017 5329's as a stand...

that was beautiful. thanks a lot.

I had a question about the 5329 - Do I have to pay the 10...

Since the distribution of the excess is a normal distribu...

Perfect. Thank you

If it's been less than 60 days since the distribution fro...

Re: Since the distribution of the excess is a normal distribu...

Re: Since the distribution of the excess is a normal distribu...

Re: You must file 2016 and 2017 Forms 5329 to report and pay...

Roth IRA Excess Contribution on 2017 - How to fix it?

You did not receive distributions of the excess contrib...

Since the excess was removed in 2019, there will be no...